Taxes and death are inevitability, but that doesn’t mean you can’t prepare for both! Taxes effect you almost every day in the form of sales tax, every year in the form of income tax and even at death with the estate tax.
Let’s be real here: doing your taxes is an overwhelming process. This is especially true if you have sold or are planning to sell your home. In the past, you could usually get away with using an easy tax software, oftentimes free of charge, and calling it good. However, with homeownership comes a lot more responsibility, especially those of the tax variety.
Because the United States wants to support the real estate market as it has a positive impact on the economy, there are several tax breaks in place to take some of the financial burden off of those who sell their house. To take advantage of these tax breaks, make sure you become acquainted with the following documents!
IRS Publication 523, Selling Your Home.
Like we mentioned earlier, not everyone who sells their home will need to pay taxes on the money they earn from the sale. More specifically, qualified individuals don’t need to pay taxes on the first $250,000 of the sale and qualified married couples are excluded from paying taxes on the first $500,000 of the sale. Given the fact that a good portion of home sellers in the country can meet this threshold—unless your home’s value increased by a huge percentage—most homeowners in the country will benefit from this tax break.
The document that homeowner’s should look out for is the IRS Publication 523, Selling Your Home. This will give you all of the information you need on this tax exclusion and how to take advantage of it.
In the event that you do earn a capital gain of over $250,000/$500,000, you can write off some of the expenses. What home sellers can write off includes real estate agent fees, costs of home improvements, marketing expenses for the listing, legal fees, escrow fees, and more.
One of the most pressing home sale tax questions is if you can include property taxes in your deductions. The answer is yes: you have the opportunity to write off the taxes you paid on your mortgage. If you’re in the process of selling, check out form 1098, Mortgage Interest Statement. This will help you figure out how much you paid in taxes and potentially how much you can write off.
Another write off to consider is the interest you paid on your mortgage during the year. You are able to deduct interest on the first $750,000 of the mortgage, according to the IRS. Use form 1080 A to itemize deductions. If you are in the process of selling your home, calculate the interest you’ve paid this year on your mortgage up until you close the sale. This can get confusing, so to be sure, hire an accountant or tax professional to guide you through this.
Taxes don’t need to be as stressful as they appear. If you keep organized and speak with a tax professional, you should be good as gold when tax season rolls around!